The Democratic COVID-19 Testing Strategy

Senator Patty Murray has released a Democratic proposal to increase our capacity to test for the coronavirus.  The report quite rightly emphasizes that expanded testing is critical for containing the epidemic and re-opening the economy.  It criticizes the Trump administration for it’s failure to recognize the need for extensive testing:

Democrats demand a clear, detailed plan to rapidly scale and optimize COVID-19 testing in the United  States. This plan must take a “whole of society” approach that, led by the federal government, will quickly scale and optimize COVID-19 testing, mitigate additional community spread, and help get America back to work.

The proposal is summarized as follows:

Testing is one of the most critical elements to beating this virus. Congress should designate $30 billion in new  emergency funding to support the rapid expansion and optimization of testing for COVID-19 in the  United States. While the funds would be directed to a broad range of testing and related activities, including critical surveillance and contact tracing, a significant portion of this funding should be dedicated to:

• Optimize the testing supply chain at a national level, addressing manufacturing shortages of testing kits and  supplies through increased production, including through matching excess supplies or personnel with demand in other  locations, centralized procurement of testing supplies, guaranteed contracts to manufacturers, and effective use of  the Defense Production Act, when necessary; and
• Develop and validate different types of tests necessary, including rapid, molecular point-of-care and at-home  testing platforms, to effectively monitor and control COVID-19.

This is an important step.  My comments:

The plan is not nearly ambitious enough.  If the epidemic continues for months, the health, social and economic toll will be devastating.  The immediate economic cost will run into the tens of trillions of dollars, and the economic devastation may last for years.  The political consequences are unpredictable but could be severe; there is a small but real risk that our democracy will not survive.  Given the stakes, we should do everything we can to increase our ability to test, so that we can identify people with the virus and let everyone else go back to work, school, and life.

No one knows how many tests we need to do to prevent an ongoing disaster, or how fast we can ramp up testing capacity.  But the more money we throw at the problem, the better we will do.

The amount of money in the bill is clearly inadequate.  Suppose we want to be able to test 10 million people a day for 90 days.  If the fully loaded cost of a test including the cost of new testing equipment, test kits, protective gear, and labor is $100, then 10 million tests a day for 90 days will cost $90 billion, three times the amount contemplated in the Democratic plan.  Given the costs of an ongoing epidemic, why hold back?

There is great uncertainty about the costs of testing.  Siddarth and Weyl suggest the cost could be $15 due to falling costs.  However, demand is being restrained by the current restrictive testing guidelines and labs are currently struggling with test kits and swabs.  I suspect that the main bottleneck to testing will soon be the PCR machines that identify viral RNA, and it seems likely that costs will rise, not fall, once current capacity limits are reached.

To get manufacturers to scale up production of PCR machines, we need to give them firm contractual commitments NOW.  These commitments can take the form of cost-plus contracts or incentive contracts.  What is critical is that we give manufacturers reasonable assurance that their investments in capacity will not be lost if the epidemic wanes, and that the prices they ultimately get paid will be sufficient to compensate them for all the risks that they will face, including the risk that the government decides to play hardball with them after they have invested million of dollars increasing their productive capacity.  Giving companies contracts is the way to avoid this risk.

I can’t emphasize enough the need for speed in giving out contracts.  Expanding production capacity could prove to be very difficult.  It took over 7 months to build the first liberty ships during the World War II mobilization.  That timeline would push mass testing back to late fall.  We should have started this process at least a month ago.

Finally, there are questions about the Trump administration.  I have argued that Trump is unwilling to lead the effort to increase production of tests and personal protective gear because his main concern is blame avoidance, and that his inner circle is incompetent and could not lead a massive contracting effort in any event.  As awareness of the importance of testing has risen, the political costs to Trump for not leading this effort may rise to the point that he wants to lead the effort, but I still maintain that his administration simply will not be able to lead this effort.

The Democratic plan does not address this problem.  The document assumes that Congress can delegate responsibility for achieving the goal of increased testing to the executive branch.  This is the standard approach, but there is a good chance it won’t work due to Trump’s desire to avoid blame, and his incompetence and corruption.  Asking the Trump administration for a plan to increase testing may succeed as an exercise in political messaging, but there is a good chance it will fail to deliver enough testing capacity.

There are no perfect options here, but here are some nonconventional suggestions:

1:  Give money to purchase capital equipment or to contract for testing to the states, with the caveat that the states need to sign contracts by (say) May 31 and receive delivery of testing equipment by September 30.  (Obviously, there could be staggered deadlines, with some equipment delivered sooner and some later, and some contracts signed sooner and some later.)

2:  Congress could set payments directly rather than delegating contracting authority to the executive branch.  I described previously how this might work:

Suppose that we want to sharply increase the number of coronavirus tests that can be performed daily.  Congress could offer to pay a high price – say $100 per test – for the first billion tests made available. . . . The fact that the high price is available for the first billion tests will give companies an incentive to be quick to market.  These payments could be subdivided by industry segment to reduce risk and encourage multiple approaches.  For example, some of the money could be designated to pay for tests run on newly produced high-volume PCR machines, some could be designated for tests run on newly produced portable machines, some for non-PCR technologies, some for serological tests, some for mass testing combining multiple swabs (this might earn a higher price per test, not per patient).  Prices could also vary with the sensitivity and specificity of tests.  The payments could be available for (say) 10 months, or until all the tests are used, whichever comes first.  At that point any needed tests would be paid for at the (much lower) market price that would then prevail, given the expansion in capacity.

This is not a perfect solution, in part because it does not provide for cost-plus contracts for organizations that are risk-averse or capital constrained.  But it could still work.

3:  Congress could bypass the standard procurement contracting by giving contracting authority to the Gates Foundation and other foundations, or to a consortium of foundations.  They would have to be held completely harmless as long as they don’t divert funds for personal use and avoid conflicts of interest.  I assume that the Gates Foundation has considerable contracting capabilities, and that their processes are more flexible and less bureaucratic than contracting processes within the federal government.  They still may not be willing to do this.

4:  Congress could delegate contracting authority to the Federal Reserve, taking advantage of its huge number of economists and its high degree of independence from the executive branch.

None of these approaches is better than delegating contracting authority to a competent, well-led executive branch.  But that is not an option for us today.